Leasing looking up

The truck and trailer equipment market is enjoying a cyclical upswing after overcoming a recent down cycle. Market strength is anticipated to continue into 2006 fueled by factors that include solid domestic economic conditions, a shortage of trucks, pre-buys before the 2007 EPA-mandated engine change, better trade values, replacement of equipment firms couldn't afford to buy previously, and the possible re-emergence of bonus depreciation. As a result, the truck and trailer equipment leasing market is also anticipating strong growth years. An examination of the current market situation, driving forces, and leasing companies' expectations provide a clear picture of this critical financing and asset management mechanism to the trucking industry.

Leasing companies strongly anticipate trucking firms will turn to lease financing to manage their cash flow and debt, conserve capital, and leverage the many other advantages of leasing to acquire their equipment. In the most recent Survey of Industry Activity Report issued by the Equipment Leasing Association in 2004, the trucks and trailers represented 9.9 percent of new business volume among responding leasing companies during fiscal year 2003. This was the second highest category (after aircraft) of new business volume. The same study reported that truck equipment ranked fifth among end-user industries in new leasing business volume with 7.2 percent of the total.

In studies presented at ELA's recent Equipment Management Conference, trucks and trailers were consistently ranked among the equipment types with the highest growth potential and stable secondary market value. These two factors make trucks and trailers very attractive assets for leasing for both the lessee and the lessor.

Avoiding the negatives

Many of the same factors that impact the truck and trailer industry impact the leasing market. However, increasing fuel prices, an ongoing industry concern, didn't seem to have a major effect on truck and trailer leasing over the past year. One reason is that with tight capacity, surcharges are being passed along with little or no issue. Since customers are recouping their expenses, they are finding they are in less of a cash-strapped position than in previous years. Leasing companies believe that even dramatically higher fuel costs shouldn't be an issue as long as capacity remains high and the economy stays strong.

Market consolidation continued, with deals such as GE Commercial Finance's announcement to acquire CitiCapital's Transportation Financial Services Group. The acquisition gives GE the capacity of CitiCapital's financing of approximately 196,000 heavy and medium duty commercial trucks and trailers, in addition to opportunities for creating additional market share. The deal is an indicator of the inherent potential in the positive conditions of this market.

The overall outlook for the For Hire market is optimistic, as trucking firms will need to increase their fleets while replacing a large number of older trucks. In 2005, there should be between 250,000 and 260,000 trucks produced, representing one of the strongest markets in history.

Buying early?

Leasing companies are finding that the scheduled engine change for 2007 is coming into play now, though they offer varying viewpoints as to its extent. While some lessors believe that the high number of pre-buys anticipated may be significantly less than expected (20-25% rather than the 50% projected), even more report that customers are eager to acquire their trucks before the deadline. And while bonus depreciation probably caused a small pre-buy in 2004, it has the potential to become a factor in 2005 if it is reenacted.

The 2005 CIT Construction Industry Forecast, which reported that contractors are optimistic about the prospects for their business and the industry as a whole for 2005, bodes well for the vocational truck leasing market. Thirty-seven percent of the contractors in the survey said they plan to acquire a truck in 2005, compared to 31% who planned to a year ago. For the tenth consecutive year, CIT's survey found more contractors planning to acquire trucks than any other type of equipment. Leasing companies are seeing less room for price negotiation as demand rises and manufacturers require longer lead times.

The small ticket truck leasing market, including dump trucks, delivery trucks, and construction-use trucks, has not experienced the same issues that larger truck and trailer leasing companies have had to contend with and has performed well. Lessors in this segment are optimistic that they will continue to build business.

Attractive financing

Truck and trailer companies should be seeing a greater variety of attractive financing options now, including leasing. Lessors are encouraged by stronger credit quality among customers. Many leasing companies have observed the transportation sector returning to favor with bank lenders, and they are now competing with banks for tier one trucking companies. Banks' recurring interest appears to consistently coincide with the regular improvement cycles of truck and trailers.

There are many financing options available to contractors acquiring vocational trucks. They will often establish a line of revolving credit, allowing them to leverage their existing equipment fleet equity. Lessors also are seeing a slight increase in the number of construction companies that choose to lease over purchasing trucks. While interest rates continue to be at very affordable levels, they are expected to rise in 2005. This is resulting in truck buyers choosing fixed-rate rather than floating-rate loans and leases when acquiring equipment.

Tax-affected terminal rental adjustment clause (TRAC) transactions were lower over the last year due to the high amount of corporate liquidity and the desire of lessees to keep tax benefits provided through bonus depreciation. Leasing companies that were looking forward to a strong increase in truck and trailer lease transactions, both tax and non-tax, with the expiration of bonus depreciation at the end of 2004 will have to adjust their expectations with bonus depreciation still potentially in play.

Though leasing companies are calling for trucking to remain stable and strong, they advise companies to manage all costs. Various technological advancements, such as improved GTS tracking, are enabling better management control that can translate into cost savings.

For truck and trailer firms wanting more information about leasing, including the ten questions to ask before signing a lease, a glossary of leasing terms, and a directory of leasing companies throughout the U.S., please refer to www.ChooseLeasing.org.

Michael Fleming has been president of the Equipment Leasing Association (www.chooseleasing.org) since 1979.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish